Credit default swaps

[Shau_2207]

Hello,

Can someone please help me with excel sheet of credit default swaps valuation with reference to attached video?

 

[David Harper CFA FRM]

HI @Shau_2207 That particular XLS is old (eg., YELLOW inputs may not match) but here it is (or a very close version). It's really based on Hull's excellent, accessible credit derivatives chapter. See attached. Thanks,

 

[Shau_2207]

Thank you so much David

 

[Shau_2207]

Hello @David Harper CFA FRM,

Sorry to come back on this again, Can you please help to understand CS01 terminology and the calculation behind it.

1) What is the difference between Spread 01 and CS01 are these same? If not then; Is there a way we can derive or calculate it using the same spreads ?
2) Is my understanding correct CS01 is same like DV01 which is a measure of interest rate risk ; CS01 is Spread on 1 basis point which measures credit risk.
3) As mentioned in Malz readings we are using Z-spreads to calculate Spread 01 , can we use CDS derived spreads or YTM to arrive at Spread 01.
4) Can you please share an example of MTM PnL due to spreads increase or decrease to either party using CS01/Spread 01?

Many Thanks in Advance.

 

[Sixcarbs]

Hello @David Harper CFA FRM,

Sorry to come back on this again, Can you please help to understand CS01 terminology and the calculation behind it.

1) What is the difference between Spread 01 and CS01 are these same? If not then; Is there a way we can derive or calculate it using the same spreads ?
2) Is my understanding correct CS01 is same like DV01 which is a measure of interest rate risk ; CS01 is Spread on 1 basis point which measures credit risk.
3) As mentioned in Malz readings we are using Z-spreads to calculate Spread 01 , can we use CDS derived spreads or YTM to arrive at Spread 01.
4) Can you please share an example of MTM PnL due to spreads increase or decrease to either party using CS01/Spread 01?

Many Thanks in Advance.

I am going to risk my reputation here and take a crack at this.

Spread01 is related to shifting the z-spread up and down 0.5 bps and noting the difference in the price of the bond.

A CDS requires the probability of default to calculate the price of a CDS. That probability can be derived form the hazard rate (lambda).

Lambda can be approximated by:

Lambda = (z)/(1-R), where z is the spread over a reference rate like Libor, and R is the recovery rate.

So, I think CS01 is found by changing the spread z up and down 0.5 bps and recalculating lambda, and then using that new lambda to calculate a new CDS price for up and down, and I think that difference is CS01.

I think that is it.

 

[Shau_2207]

Thanks @Sixcarbs, even I have similar view.

Hi David, Can you please confirm ?